Mining
IRS Notice 2014-21 establishes that cryptocurrency mining is a trade or business activity. Mining involves the creation of new assets through computational work. The IRS treats it similarly to manufacturing, not passive investing. When a tax-exempt entity such as an IRA or Solo 401(k) regularly engages in a trade or business, that activity generates Unrelated Business Taxable Income (UBTI), which is subject to Unrelated Business Income Tax (UBIT).
Mining is not suitable as a plan investment strategy in most cases. The tax burden on UBTI, combined with the energy and infrastructure costs of mining operations makes the after-tax economics unfavorable for most retirement plan investors.
Staking
Staking is more nuanced. Rev. Rul. 2023-14 establishes that staking rewards are gross income at the time the taxpayer gains dominion and control over the newly received tokens. The ruling addresses when income is recognized, not whether that income constitutes UBTI for a tax-exempt plan.
The UBIT analysis for staking depends on how the staking is conducted:
Running a validator node directly, where the plan actively participates in block validation through its own infrastructure, is likely to be characterized as a trade or business activity, generating UBTI on the rewards received.
Passive delegation through an exchange, where the plan simply allows the exchange to stake its holdings and receives a share of rewards, presents a less clear picture. The passive nature of the arrangement argues against trade or business characterization, but the IRS has not issued definitive guidance on this distinction for retirement plans. This remains a gray area.
If your plan is considering any staking arrangement, consult a tax advisor familiar with UBIT before proceeding.
Tax filing requirements
When UBTI exceeds $1,000 in a tax year, the plan must file IRS Form 990-T and pay tax from plan funds. The Form 990-T filing obligation is separate from your personal tax return. UBIT has no effect on and is not reported on your individual return. You are responsible for ensuring the return is filed and the tax is paid on time.
Frequently Asked Questions
Does simply holding cryptocurrency in a plan generate UBIT?
No. Buying, holding, and selling digital tokens is a passive investment activity, fully tax-sheltered within the plan. Capital appreciation and gains from trading are not UBTI. Only active business activities such as mining, staking with validator responsibility, or similar operational involvement create UBTI exposure.
Is exchange-based staking ever worth pursuing in a plan?
Potentially, but with open eyes. The tax treatment is unsettled, rewards are typically modest relative to account value, and the cost of professional tax advice and a Form 990-T filing may exceed the benefit. Weigh those factors before enabling staking features on a plan exchange account.